Select the correct answer for each of the following questions.
1. Growth in the complexity of the U.S. business environment
a. Has led to increased use of partnerships to avoid legal liability.
b. Has led to increasingly complex organizational structures as management has attempted to achieve its business objectives.
c. Has encouraged companies to reduce the number of operating divisions and product lines so they may better control those they retain.
d. Has had no particular impact on the organizational structures or the way in which companies are managed.
2. Which of the following is not an appropriate reason for establishing a subsidiary?
a. The parent wishes to protect existing operations by shifting new activities with greater risk to a newly created subsidiary.
b. The parent wishes to avoid subjecting all of its operations to regulatory control by establishing a subsidiary that focuses its operations in regulated industries.
c. The parent wishes to reduce its taxes by establishing a subsidiary that focuses its operations in areas where special tax benefits are available.
d. The parent wishes to be able to increase its reported sales by transferring products to the subsidiary at the end of the fiscal year.
3. Which of the following actions is likely to result in recording goodwill on Randolph Company’s books?
a. Randolph acquires Penn Corporation in a business combination recorded as a merger.
b. Randolph acquires a majority of Penn’s common stock in a business combination and continues to operate it as a subsidiary.
c. Randolph distributes ownership of a newly created subsidiary in a distribution considered to be a spin-off.
d. Randolph distributes ownership of a newly created subsidiary in a distribution considered to be a split-off.
4. When an existing company creates a new subsidiary and transfers a portion of its assets and liabilities to the new entity
a. The new entity records both the assets and liabilities it received at fair values.
b. The new entity records both the assets and liabilities it received at the carrying values of the original company.
c. The original company records a gain or loss on the difference between its carrying values and the fair values of the assets transferred to the new entity.
d. The original company records the difference between the carrying values and the fair values of the assets transferred to the new entity as goodwill.
5. When a company assigns goodwill to a reporting unit acquired in a business combination, it must record an impairment loss if
a. The fair value of the net identifiable assets held by a reporting unit decreases.
b. The fair value of the reporting unit decreases.
c. The carrying value of the reporting unit is less than the fair value of the reporting unit.
d. The fair value of the reporting unit is less than its carrying value and the carrying value of goodwill is more than the implied value of its goodwill.